INSPIRE MEDICAL SYSTEMS, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes to those statements included elsewhere in this Quarterly Report on Form 10-Q, as well as the audited financial statements and the related notes thereto, and the discussion under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 . Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, such as information with respect to our plans and strategy for our business and the impact of the ongoing and global COVID-19 pandemic on our business, financial results and financial condition on our business, financial results and financial condition includes forward-looking statements that involve risks and uncertainties. As a result of many important factors, including those set forth in the "Risk Factors" sections of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 and this Quarterly Report on Form 10-Q, our actual results could differ materially from the results described in, or implied, by these forward-looking statements.
Overview
We are a medical technology company focused on the development and
commercialization of innovative and minimally invasive solutions for patients
with obstructive sleep apnea ("OSA"). Our proprietary Inspire system is the
first and only FDA-approved neurostimulation technology that provides a safe and
effective treatment for moderate to severe OSA. We have developed a novel,
closed-loop solution that continuously monitors a patient's breathing and
delivers mild hypoglossal nerve stimulation to maintain an open airway. Inspire
therapy is indicated for patients with moderate to severe OSA who do not have
significant central sleep apnea and do not have a complete concentric collapse
of the airway at the soft palate level. In addition, patients in the U.S. must
have been confirmed to fail or be unable to tolerate positive airway pressure
treatments, such as CPAP, and be 18 years of age or older, though there are no
similar requirements for patients in Europe .
We sell our Inspire system to hospitals and ambulatory surgery centers ("ASCs")
in the U.S. and in select countries in Europe through a direct sales
organization. Our direct sales force engages in sales efforts and promotional
activities focused on ear, nose and throat ("ENT") physicians and sleep centers.
In addition, we highlight our compelling clinical data and value proposition to
increase awareness and adoption amongst referring physicians. We build upon this
top-down approach with strong direct-to-patient marketing initiatives to create
awareness of the benefits of our Inspire system and drive demand through patient
empowerment. This outreach helps to educate thousands of patients on our Inspire
therapy and frequently results in patient leads.
Although our sales and marketing efforts are directed at patients and physicians
because they are the primary users of our technology, we consider the hospitals
and ASCs where the procedure is performed to be our customers, as they are the
purchasing agents of our Inspire system. Our customers are reimbursed the cost
required to treat each patient through various third-party payors, such as
commercial payors and government agencies. Our Inspire system is currently
reimbursed primarily on a per-patient prior authorization basis for patients
covered by commercial payors, on a case-by-case basis for patients covered by
Medicare, and under U.S. government contract for patients who are treated by the
Veterans Health Administration . As of August 4, 2020 , we have secured positive
coverage policies with 56 U.S. commercial payors, including most large national
commercial insurers, covering approximately 182 million lives in the U.S. In
addition, all seven Medicare Administrative Contractors ("MACs") published final
policies in 2020 covering Inspire therapy. Each MAC also assigned a surgeon
reimbursement of approximately $450 for the procedure to implant the pressure
sensor (add-on CPT code +0466T). In June 2018 , Japan's Ministry of Health,
Labour and Welfare approved our Inspire therapy to treat moderate to severe OSA,
and we are currently seeking reimbursement coverage in Japan . For the six months
ended June 30, 2020 , 90.2% of our revenue was derived in the U.S. and 9.8% was
derived in Europe . No single customer accounted for more than 10% of our revenue
during the six months ended June 30, 2020 .
Our patient engagement efforts continue to include our refocused
direct-to-consumer marketing strategies, which, during the six months ended June
30, 2020 , initially included a shift from radio and TV in our larger markets
that were affected by COVID-19 towards more digital and TV in smaller markets.
During the second quarter of 2020, we
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resumed radio and TV initiatives in our larger markets as the impact of COVID-19 lessened in those areas. Further, our team has leveraged virtual tools, such as the new Inspire Sleep app released during the second quarter of 2020, and telemedicine to continue physician training and patient education. We rely on third-party suppliers to manufacture our Inspire system and its components. Many of these suppliers are currently single source suppliers. We seek to maintain higher levels of inventory to protect ourselves from supply interruptions, and, as a result, we are subject to the risk of inventory obsolescence and expiration, which could lead to inventory impairment charges. In theU.S. , our products are shipped directly to our customers on a purchase order basis, primarily by a third-party vendor with a facility inTennessee , although we do ship some products from our facility inMinnesota . Warehousing and shipping operations for our European customers are handled by a third-party vendor with a facility located inthe Netherlands . Customers do not have the right to return non-defective product, nor do we place product on consignment. Our sales representatives do not maintain trunk stock. Since our inception in 2007, we have financed our operations primarily through sales of our Inspire system, private placements of our convertible preferred securities, amounts borrowed under our credit facility, the initial public offering of our common stock that closed inMay 2018 (our "IPO") and the offerings of our common stock that closed inDecember 2018 andApril 2020 (our "follow-on offerings"). We have devoted significant resources to research and development activities related to our Inspire system, including clinical and regulatory initiatives to obtain marketing approval, and sales and marketing activities. For the three months endedJune 30, 2020 , we generated revenue of$12.2 million with a gross margin of 84.0% and had a net loss of$23.1 million compared to revenue of$18.0 million with a gross margin of 82.8% and a net loss of$7.7 million for the three months endedJune 30, 2019 . For the six months endedJune 30, 2020 , we generated revenue of$33.5 million with a gross margin of 84.3% and had a net loss of$39.3 million compared to revenue of$34.3 million with a gross margin of 82.6% and a net loss of$15.9 million for the six months endedJune 30, 2019 . Our accumulated deficit as ofJune 30, 2020 was$219.5 million . We have invested heavily in product development. Our research and development activities have been centered on driving continuous improvements to our Inspire therapy. We have also made significant investments in clinical studies to demonstrate the safety and efficacy of our Inspire therapy and to support regulatory submissions. We also continue to make significant investments building our sales and marketing organization by increasing the number ofU.S. sales representatives and continuing our direct-to-patient marketing efforts in existing and new markets throughout theU.S. and inEurope . In the three months endedJune 30, 2020 , we continued to train newU.S. medical centers and activated 16 centers, and deactivated 15 then-existing centers that no longer implant Inspire therapy, bringing the total to 328 U.S. medical centers implanting Inspire therapy as ofJune 30, 2020 . During the COVID-19 pandemic business slowdown in the second quarter of 2020, we conducted a thorough review of all centers and deactivated centers for reasons such as surgeons relocating their implanting locations as well as where the location no longer implants Inspire therapy. Additionally, we created nine new territories during the three months endedJune 30, 2020 , bringing the total to 91 U.S. territories as ofJune 30, 2020 . We continue to make investments in research and development efforts to develop our next generation Inspire systems and support our future regulatory submissions for expanded indications and for new markets such asEurope ,Japan , andAustralia . For example, inApril 2020 , we received FDA approval for an expanded age-range for Inspire therapy to include 18 to 21 year old patients. Because of these and other factors, we expect to continue to incur net losses for the next several years, and we expect to require substantial additional funding, which may include future equity and debt financings. OnApril 16, 2020 , we completed a follow-on offering that included our offer and sale of 2,300,000 shares of common stock at a public offering price of$58.00 per share. We received net proceeds of approximately$124.7 million after deducting underwriting discounts and commissions and offering expenses. Outlook We expect the COVID-19 pandemic to continue to adversely impact our revenue due to the significant decreases and delays in the number of Inspire therapy procedures performed and patients screened for eligibility for Inspire therapy. Beginning in the second week ofMarch 2020 , substantially all of the scheduled Inspire therapy procedures were postponed and numerous other authorized cases were unable to be scheduled. DuringApril 2020 , the widespread shutdown in elective surgical procedures continued, with surgical volumes increasing in May and even 26
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further in June, yet still remaining below pre-COVID-19 levels. The resurgence of COVID-19 in variousU.S. regions has, and will likely continue to, adversely impact our procedure volumes. A portion of the second quarter 2020 procedures performed were those rescheduled fromMarch 2020 , however, a backlog continues to grow into the second half of 2020. Once the pandemic subsides, we anticipate that there will be a substantial backlog of patients seeking appointments with physicians and surgeries to be performed at hospitals and ambulatory surgery centers relating to a variety of medical conditions and that patients seeking Inspire therapy procedures may have to navigate limited provider, hospital and ambulatory surgery center capacity. In response to the spread of COVID-19 and in line with recommendations from federal and local government and healthcare agencies, we transitioned employees, except for those deemed essential to key aspects of our business, to a remote work environment. Beginning inMay 2020 , our corporate office re-opened with strict sanitation and physical distancing protocols, although many corporate employees continue to work remotely as a heightened precautionary measure. Additionally, our field staff continues to primarily work remotely and must adhere to the respective hospital's and ambulatory surgery center's COVID-19 protocols when visiting centers. During the period during which surgical procedures have been, and continue to be significantly limited, we identified and implemented innovative solutions to support patients who have Inspire therapy, as well as continuing to educate patients who may be struggling with their sleep apnea. Patients continue to reach out to learn more about the therapy and get connected to a healthcare provider, and we are supporting this interaction through the use of several virtual tools, including the new Inspire Sleep app, and telemedicine. We are also not expecting any material changes to our headcount and are continuing with our planned expansion in recruiting Territory Managers, though we have slightly reduced our hiring initiatives for sales support roles. To date, we have not experienced disruptions to our supply chain network as a result of the COVID-19 pandemic. We have also not reduced our capital expenditures and are continuing to invest in research and development, however, we may determine to allocate resources differently due to impacts of the COVID-19 pandemic. Notwithstanding our expected reduced revenue, we believe that our existing cash resources will be sufficient to meet our capital requirements and fund our operations for at least the next 12 months. For additional information, see "- Liquidity and Capital Resources." Components of Our Results of Operations Revenue We derive primarily all of our revenue from the sale of our Inspire system to hospitals and ambulatory surgery centers in theU.S. and select countries inEurope . We recognize revenues from sales of our Inspire system when the customer obtains control of the product, which occurs at a point in time, either upon shipment of the product or receipt of the product, depending on shipment terms. Our revenue has fluctuated, and may continue to fluctuate, from quarter to quarter due to a variety of factors. For example, we have historically experienced seasonality in our first and fourth quarters and have experienced adverse impacts on our revenue due to the COVID-19 pandemic. Revenue for the three and six months endedJune 30, 2020 was negatively impacted due to the global pandemic associated with COVID-19. Specifically, inMarch 2020 , healthcare facilities and clinics began restricting access to their clinicians, reducing patient consultations and treatments or temporarily closing their facilities. As a result, beginning in the second week ofMarch 2020 , substantially all of our then-scheduled Inspire therapy procedures were postponed, and numerous other cases with prior authorization could not be scheduled and were, therefore, also postponed. DuringApril 2020 , the widespread shutdown in elective surgical procedures continued, with surgical volumes increasing in May and even further in June, yet still remaining below pre-COVID-19 levels. A portion of the second quarter 2020 procedures performed were rescheduled fromMarch 2020 , however, a backlog continues to grow into the second half of 2020. 27
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Cost of Goods Sold and Gross Margin Cost of goods sold consists primarily of acquisition costs for the components of the Inspire system, overhead costs, scrap, and inventory obsolescence, as well as distribution-related expenses such as logistics and shipping costs, net of costs charged to customers. The overhead costs include the cost of material procurement, depreciation expense for production equipment, warranty replacement costs, and operations supervision and management personnel, including employee compensation, stock-based compensation, supplies, and travel. We expect cost of goods sold to increase or decrease in absolute dollars primarily as, and to the extent, our revenue grows or declines, respectively. We calculate gross margin as gross profit divided by revenue. Our gross margin has been and we expect it will continue to be affected by a variety of factors, including manufacturing costs, the average selling price of our Inspire system, the implementation of cost-reduction strategies, inventory obsolescence costs, which generally occur when new generations of our Inspire system are introduced, and to a lesser extent the sales mix between theU.S. andEurope as our average selling price in theU.S. tends to be higher than inEurope . Our gross margin may increase over the long term to the extent our production volumes increase and we receive discounts on the costs charged by our contract manufacturers, thereby reducing our per unit costs. However, our gross margin may fluctuate from quarter to quarter due to seasonality. Research and Development Expenses Research and development expenses consist primarily of product development, engineering, clinical studies to develop and support our products, regulatory expenses, quality assurance, testing, consulting services and other costs associated with the next generation versions of the Inspire system. These expenses include employee compensation, including stock-based compensation, supplies, materials, consulting, and travel expenses related to research and development programs. Additionally, these expenses include clinical trial management, payments to clinical investigators, data management and travel expenses for our various clinical trials. We expect research and development expenses to increase in the future as we develop next generation versions of our Inspire system and continue to expand our clinical studies to secure positive coverage policies from private commercial payors in theU.S. and enter into new markets including additional European countries,Japan , andAustralia . We expect research and development expenses as a percentage of revenue to vary over time depending on the level and timing of initiating new product development efforts and new clinical development activities. Selling, General and Administrative Expenses Selling, general and administrative expenses consist primarily of compensation for personnel, including base salaries, stock-based compensation expense and commissions related to our sales organization, finance, information technology, and human resource functions, as well as spending related to marketing, sales operations, and training and reimbursement personnel. Other selling, general and administrative expenses include training physicians, travel expenses, advertising, direct-to-patient promotional programs, conferences, trade shows and consulting services, professional services fees, audit fees, insurance costs and general corporate expenses, including facilities-related expenses. Other (Income) Expense, Net Other (income) expense, net consists primarily of interest expense payable under our credit facility and interest income. 28
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Results of Operations
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 $ Change % Change 2020 2019 $ Change % Change
(in thousands, except percentages)
Revenue $ 12,183 $ 18,032 $ (5,849) (32.4) % $ 33,530 $ 34,282 $ (752) (2.2) %
Cost of goods sold 1,954 3,094 (1,140) (36.8) % 5,251 5,948 (697) (11.7) %
Gross profit 10,229 14,938 (4,709) (31.5) % 28,279 28,334 (55) (0.2) %
Gross margin 84.0% 82.8% 84.3% 82.6%
Operating expenses:
Research and development 6,062 2,846 3,216 113.0 % 11,500 5,449 6,051 111.0 %
Selling, general and
administrative 26,981 20,268 6,713 33.1 % 56,033 39,838 16,195 40.7 %
Total operating expenses 33,043 23,114 9,929 43.0 % 67,533 45,287 22,246 49.1 %
Operating loss (22,814) (8,176) (14,638) 179.0 % (39,254) (16,953) (22,301) 131.5 %
Other expense (income),
net 275 (526) 801 (152.3) % 80 (1,037) 1,117 (107.7) %
Net loss $ (23,089) $ (7,650) $ (15,439) 201.8 % $ (39,334) $ (15,916) $ (23,418) 147.1 %
Comparison of the Three Months Ended June 30, 2020 and 2019
Revenue
Revenue decreased $5.8 million , or 32.4%, to $12.2 million for the three months
ended June 30, 2020 compared to $18.0 million for the three months ended June
30, 2019 . The decrease was attributable to a $4.8 million decrease in sales of
our Inspire system in the U.S. and a decrease of $1.1 million in Europe ,
primarily in Germany . Beginning in March 2020 , our revenue growth in the U.S.
and Europe was impacted by the COVID-19 pandemic, which disrupted our ability to
access our clinician customers and their patients. Specifically, we saw
healthcare facilities and clinics restricting access to their clinicians,
reducing patient consultations and treatments, or closing temporarily due to
COVID-19. As a result, beginning in the second week of March 2020 , substantially
all of our Inspire therapy procedures were postponed and numerous other cases,
which had received prior authorization, were not able to be scheduled and,
therefore were also postponed. During April 2020 , the widespread shutdown in
elective surgical procedures continued, with surgical volumes increasing in May
and even further in June, yet still remaining below pre-COVID-19 levels.
Revenue information by region is summarized as follows:
Three Months Ended June 30,
2020 2019 Change
Amount % of Revenue Amount % of Revenue $ %
(in thousands, except percentages)
United States $ 10,984 90.2 % $ 15,754 87.4 % $ (4,770) (30.3) %
Europe 1,199 9.8 % 2,278 12.6 % (1,079) (47.4) %
Total revenue $ 12,183 100.0 % $ 18,032 100.0 % $ (5,849) (32.4) %
Revenue generated in the U.S. was $11.0 million for the three months ended June
30, 2020 , a decrease of $4.8 million , or 30.3%, compared to the three months
ended June 30, 2019 . The revenue decline in the U.S. was primarily due to
impacts from the COVID-19 pandemic.
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Revenue generated inEurope was$1.2 million in the three months endedJune 30, 2020 , a decrease of$1.1 million , or 47.4%, compared to the three months endedJune 30, 2019 . The revenue decline inEurope was primarily due to impacts from the COVID-19 pandemic. Cost of Goods Sold and Gross Margin Cost of goods sold decreased$1.1 million , or 36.8%, to$2.0 million for the three months endedJune 30, 2020 compared to$3.1 million for the three months endedJune 30, 2019 . The decrease was primarily due to lower sales volume of our Inspire system. Gross margin increased to 84.0% for the three months endedJune 30, 2020 compared to 82.8% for the three months endedJune 30, 2019 . Gross margin for the three months endedJune 30, 2020 was higher primarily due to manufacturing efficiencies. Research and Development Expenses Research and development expenses increased$3.3 million , or 113.0%, to$6.1 million for the three months endedJune 30, 2020 compared to$2.8 million for the three months endedJune 30, 2019 . This change was primarily due to an increase of$2.5 million for ongoing research and development costs, including ongoing development of the next generation Inspire therapy system and$0.6 million of compensation and employee-related expenses, mainly as a result of increased headcount, and$0.2 million of regulatory submissions and clinical studies expenses. Selling, General and Administrative Expenses Selling, general and administrative expenses increased$6.7 million , or 33.1%, to$27.0 million for the three months endedJune 30, 2020 compared to$20.3 million for the three months endedJune 30, 2019 . The primary driver of this increase was an increase of$6.5 million in compensation, including salaries, commissions, and stock-based compensation, and other employee-related expenses, mainly as a result of increased headcount, offset by a decrease of$1.3 million of travel expenses not incurred due to the COVID-19 pandemic. In addition, marketing expenses increased$1.0 million , primarily consisting of direct-to-patient initiatives, including TV advertisements which began airing in the second half of 2019. During the three months endedJune 30, 2020 , we continued to leverage virtual tools, including the new Inspire Sleep app released in the second quarter of 2020, and telemedicine to continue physician training and patient education. Other drivers of the increase to selling, general and administrative expenses included an increase of$0.5 million due to insurance costs, financial audit fees, consulting fees and information technology supplies and equipment. Other (Income) Expense, Net Other (income) expense, net decreased by$0.8 million , or 152.3%, to$0.3 million of expense, net for the three months endedJune 30, 2020 compared to$0.5 million of income for the three months endedJune 30, 2019 . This change was primarily due to a decrease in interest income of$0.8 million earned on our cash, cash equivalents and investments balances due to lower interest rates. Comparison of the Six Months EndedJune 30, 2020 and 2019 Revenue Revenue decreased$0.8 million , or 2.2%, to$33.5 million for the six months endedJune 30, 2020 compared to$34.3 million for the six months endedJune 30, 2019 . The net decrease was attributable to a decrease of$0.9 million inEurope , primarily inGermany , partially offset by a$0.1 million increase in sales of our Inspire system in theU.S. Beginning inMarch 2020 , our revenue growth in theU.S. andEurope was impacted by the COVID-19 pandemic, which disrupted our ability to access our clinician customers and their patients. Specifically, we saw healthcare facilities and clinics restricting access to their clinicians, reducing patient consultations and treatments, or closing temporarily due to COVID-19. As a result, beginning in the second week ofMarch 2020 , substantially all of 30
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our Inspire therapy procedures were postponed and numerous other cases, which had received prior authorization, were not able to be scheduled and, therefore were also postponed. DuringApril 2020 , the widespread shutdown in elective surgical procedures continued, with surgical volumes increasing in May and even further in June, yet still remaining below pre-COVID-19 levels. Revenue information by region is summarized as follows: Six Months Ended June 30, 2020 2019 Change Amount % of Revenue Amount % of Revenue $ % (in thousands, except percentages) United States$ 30,258 90.2 %$ 30,109 87.8 %$ 149 0.5 % Europe 3,272 9.8 % 4,173 12.2 % (901) (21.6) % Total revenue$ 33,530 100.0 %$ 34,282 100.0 %$ (752) (2.2) % Revenue generated in theU.S. was$30.3 million for the six months endedJune 30, 2020 , an increase of$0.1 million , or 0.5%, compared to the six months endedJune 30, 2019 . Revenue growth in theU.S. was due to increased market penetration in existing territories, the expansion into new territories, increased physician and patient awareness of our Inspire system, a greater number of prior authorization approvals, additional positive coverage policies and, to a lesser extent, an increase in our average selling price as a result of the introduction of the new sensing lead on the Inspire system to the U.S. market inFebruary 2019 . As noted above,U.S. revenue for the six months endedJune 30, 2020 was negatively impacted by the COVID-19 pandemic. Revenue generated inEurope was$3.3 million in the six months endedJune 30, 2020 , a decrease of$0.9 million , or 21.6%, compared to the six months endedJune 30, 2019 . The revenue decline inEurope was due to impacts from the COVID-19 pandemic. Cost of Goods Sold and Gross Margin Cost of goods sold decreased$0.6 million , or 11.7%, to$5.3 million for the six months endedJune 30, 2020 compared to$5.9 million for the six months endedJune 30, 2019 . The decrease was primarily due to lower sales volume of our Inspire system. Gross margin increased to 84.3% for the six months endedJune 30, 2020 compared to 82.6% for the six months endedJune 30, 2019 . Gross margin for the six months endedJune 30, 2020 was higher primarily due to manufacturing efficiencies. Research and Development Expenses Research and development expenses increased$6.1 million , or 111.0%, to$11.5 million for the six months endedJune 30, 2020 compared to$5.4 million for the six months endedJune 30, 2019 . This change was primarily due to an increase of$4.6 million for ongoing research and development costs, including ongoing development of the next generation Inspire therapy system,$1.3 million of compensation and employee-related expenses, mainly as a result of increased headcount, and$0.2 million of regulatory submissions and clinical studies expenses. Selling, General and Administrative Expenses Selling, general and administrative expenses increased$16.2 million , or 40.7%, to$56.0 million for the six months endedJune 30, 2020 compared to$39.8 million for the six months endedJune 30, 2019 . The primary driver of this increase was an increase of$12.1 million in compensation, including salaries, commissions, and stock-based compensation, and other employee-related expenses, mainly as a result of increased headcount, offset by a decrease of$1.1 million of travel expenses not incurred due to the COVID-19 pandemic. In addition, marketing expenses increased$4.2 million , primarily consisting of direct-to-patient initiatives, including TV advertisements which began airing in the second half of 2019. During the six months endedJune 30, 2020 , we initially refocused 31
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our direct-to-consumer marketing strategies by shifting from radio and TV in our larger markets that were affected by COVID-19 towards more digital and TV in smaller markets. During the second quarter of 2020, we resumed radio and TV initiatives in our larger markets as the impact of COVID-19 lessened in those areas. Further, our team leveraged virtual tools, including the new Inspire Sleep app released in the second quarter of 2020, and telemedicine to continue physician training and patient education. Other drivers of the increase to selling, general and administrative expenses included an increase of$0.9 million due to insurance costs, financial audit fees, consulting fees and information technology supplies and equipment. Other (Income) Expense, Net Other (income) expense, net decreased by$1.1 million , or 107.7%, to$0.1 million of expense, net for the six months endedJune 30, 2020 compared to$1.0 million of income for the six months endedJune 30, 2019 . This change was primarily due to a decrease of$1.2 million in interest income due to lower interest rates on our cash, cash equivalents and investments balances, partially offset by a$0.1 million increase in unrealized gain on investments.
Seasonality
Historically, we have experienced seasonality in our first and fourth quarters, and we expect this trend to continue. In theU.S. , we have experienced, and may in the future experience, higher sales in the fourth quarter as a result of patients having paid their annual insurance deductibles in full, thereby reducing their out-of-pocket costs. In the first quarter of each year inEurope , we have experienced, and may in the future experience, reduced demand for our Inspire therapy as Neue Untersuchungs-und-Behandlungsmethoden ("NUB") coverage status is being determined and as hospitals are establishing their budgets pertaining to allocation of funds to purchase our Inspire therapy. Liquidity and Capital Resources Our sources of capital have historically been from public and private sales of our securities, sales of our Inspire system and borrowings under credit facilities. As ofJune 30, 2020 , we had cash, cash equivalents and investments of$242.6 million and an accumulated deficit of$219.5 million , compared to cash, cash equivalents and investments of$155.7 million and an accumulated deficit of$180.2 million as ofDecember 31, 2019 . OnApril 16, 2020 , we completed a follow-on offering that included our offer and sale of 2,300,000 shares of common stock at a public offering price of$58.00 per share. We received net proceeds of approximately$124.7 million after deducting underwriting discounts and commissions and offering expenses. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. An extended period of global supply chain and economic disruption could materially affect our business, results of operations, access to sources of liquidity and financial condition. However, we believe that our existing cash resources will be sufficient to meet our capital requirements and fund our operations for at least the next 12 months. We may also seek liquidity through additional securities offerings or through borrowings under a new credit facility. We cannot assure investors that we will be able to obtain such financing on commercially reasonable terms if at all. 32
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Cash Flows
The following table presents a summary of our cash flow for the periods
indicated:
Six Months Ended
June 30,
2020 2019
(in thousands)
Net cash provided by (used in):
Operating activities $ (40,026) $ (23,826)
Investing activities 101,160 (23,066)
Financing activities 127,232 875
Effect of exchange rate on cash 11 (3)
Net increase (decrease) in cash and cash equivalents
Operating Activities The net cash used in operating activities was$40.0 million for the six months endedJune 30, 2020 and consisted of a net loss of$39.3 million , a decrease in net operating assets of$7.3 million and an increase in non-cash charges of$6.6 million . The non-cash charges consisted of stock-based compensation, non-cash lease expense, depreciation and amortization, stock issued for services rendered, and accretion of the debt discount, offset by the non-cash income related to the accretion of the investment discount, and other, net. Operating assets includes inventories, which increased due to continued manufacturing of systems inventory while sales decreased due to the COVID-19 pandemic, and prepaid expenses and other current assets, which increased primarily due to the prepayment of insurance premiums. Operating assets also include accounts receivable which decreased due to decreased sales due to the COVID-19 pandemic beginning inMarch 2020 . Operating liabilities includes accrued expenses, which decreased primarily due to the payment of accrued compensation as annual bonuses were paid during the first quarter of 2020. Operating liabilities also includes accounts payable, which increased generally due to the costs to support the growth of our operations, including compensation and personnel-related costs. The net cash used in operating activities was$23.8 million for the six months endedJune 30, 2019 and consisted of a net loss of$15.9 million , an increase in net operating assets of$10.9 million and non-cash charges of$2.9 million . Net operating assets consisted of prepaid expenses and other current assets, accounts receivable, accrued expenses, inventories, and accounts payable to support the growth of our operations. Non-cash charges consisted of stock-based compensation, accretion of debt discount, non-cash lease expense, depreciation and amortization, and stock issued for services rendered, offset by the non-cash income related to the accretion of the investment discount and other, net. These changes were generally driven by our increased revenues year-over-year, which resulted in increases to accounts receivable, inventories, prepaid expenses and other expenditures, including compensation and personnel-related costs. Investing Activities Net cash provided by investing activities for the six months endedJune 30, 2020 was$101.2 million and consisted primarily of proceeds from sales or maturities of investments of$116.7 million , partially offset by purchases of investments of$14.9 million and purchases of property and equipment of$0.6 million . Net cash used in investing activities for the six months endedJune 30, 2019 was$23.1 million and consisted primarily of purchases of investments of$101.0 million , partially offset by proceeds from sales or maturities of investments of$79.2 million . Purchases of property and equipment, net were$1.2 million . Financing Activities Net cash provided by financing activities was$127.2 million for the six months endedJune 30, 2020 and consisted primarily of$124.7 million in proceeds from our follow-on offering inApril 2020 . Proceeds from the exercise of stock 33
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options of$1.5 million and proceeds from the issuance of common stock from our ESPP of$1.1 million made up the remainder of the cash provided by financing activities. Net cash provided by financing activities was$0.9 million for the six months endedJune 30, 2019 and consisted of$0.8 million in proceeds from the exercise of stock options and$0.6 million in proceeds from issuance of common stock from the employee stock purchase plan, partially offset by a$0.5 million final payment fee due upon the amendment of our credit facility. Indebtedness InAugust 2015 , we entered into a loan and security agreement withOxford Finance LLC ("Oxford Finance"), as lender and collateral agent. The loan and security agreement initially provided for a term A loan facility in the amount of$15.5 million , which was fully funded on the closing date, and a term B loan facility in an amount of at least$3.5 million but no more than$10.0 million , to be available in the future subject to our achievement of certain revenue milestones. We refer to our term A loan facility and our term loan B facility together as our credit facility. InFebruary 2017 , we amended the loan and security agreement to, among other things, increase borrowings under the term A loan facility by$1.0 million , increase the minimum amount of the term B loan facility to$5.0 million and reduce the maximum amount of the term B loan facility to$9.0 million . As ofJune 30, 2020 , we had$24.5 million of outstanding borrowings under our credit facility. No borrowings remain available under this credit facility. InMarch 2019 , we amended the loan and security agreement. Following such amendment, outstanding borrowings under the credit facility bear interest at an annual rate equal to the sum of (i) the greater of (A) the 30 dayU.S. LIBOR rate reported in The Wall Street Journal on the last business day of the month that immediately precedes the month in which the interest will accrue or (B) 2.50%, plus (ii) 5.10%; provided, however, under no circumstances will the basic rate be less than 7.60%. We are required to make monthly payments of interest only throughApril 1, 2022 . Following the interest-only period, we will be required to make monthly payments of interest and principal in 24 consecutive monthly installments. Outstanding borrowings under the credit facility mature onMarch 1, 2024 . On the maturity date, in addition to our regular monthly payments of principal and accrued interest, we will be required to make a payment of 3.50% of the total amount borrowed under the credit facility, which we refer to as the Final Payment, unless we have already made such payment in connection with an acceleration or prepayment of borrowings under the credit facility. Borrowings under the facility are pre-payable at our option in whole, but not in part, together with all accrued and unpaid interest thereon and, if not previously made, the Final Payment, subject to a prepayment fee of 2.0% if such borrowings are prepaid prior toMarch 27, 2021 and 1.0% if such borrowings are on or afterMarch 27, 2021 and prior to maturity. We are also required to prepay the amounts outstanding under the credit facility upon the occurrence of certain customary events of default, as well as the occurrence of certain material adverse events. The credit facility also includes certain customary affirmative and negative covenants, but does not include any financial covenants. The credit facility is secured by substantially all of our personal property other than our intellectual property. We were in compliance with all covenants under the credit facility as ofJune 30, 2020 . Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements, as defined by applicable regulations of theSEC , that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources. Contractual Obligations and Commitments There have been no material changes to our contractual obligations and commitments from those described in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 . 34
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Critical Accounting Policies and Estimates Our critical accounting policies and estimates are described in "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 . We have reviewed and determined that those critical accounting policies and estimates remain our critical accounting policies and estimates as of and for the three and six months endedJune 30, 2020 . Other than the adoption of ASU 2016-13 described in Note 2, no changes were made to our critical accounting policies during the periods presented. Recent Accounting Pronouncements We have reviewed all recently issued standards and have determined that, other than as disclosed in Note 2 and Note 4 to our unaudited financial statements included elsewhere in this Quarterly Report on Form 10-Q, such standards will not have a significant impact on our financial statements or do not otherwise apply to our operations.
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